Matthew Whiz Bu...'s  Instablog

Strategic Mindset: Market looks like it is getting ready for a correction. IV and price movement could increase. At Top Gun Options we've found a nice earnings target that fits our strategic mindset.

Target: NFLX Trading @ $109.97

Commit Criteria: (NFLX) Implied Volatility should be rising as NFLX approaches its earnings announcement on April 23rd. We will attempt to ride this increase using a straddle on the May expiration options. NFLX IV is low, giving us nice support for this trade and reducing overall risks. The market dropped yesterday, possibly giving sign of some more movement in the near future.

Tactic: OPENING 3 NFLX MAY 105/120 Strangle @ $13.48 Debit

Tactical employment:

· Buying to Open 3 NFLX May 105 Puts

· Buying to Open 3 NFLX May 120 Calls

· As a Strangle

· For a net debit of $13.38 (3 @ $1338 for a total of $4,044.00)

· Maximum Gain: Unlimited

· Maximum Loss: $4,044.00 max

Mid-Course Guidance: We will be watching for a IV changes and major price movements in NFLX as we get closer to the earnings announcement on 4/23.

Profitability Target: We would like this trade to go up 30% to a position price of $17.52.

Exit tactics:

Stop Loss of 25% - a position price of $10.11

Profit Target of 30% - a position Price of $17.52

Time Exit - Do not hold this position over the earnings announcement. In all cases exit before the end of trading on 4/23

Strategic Mindset: Earnings season is approaching for some heavies both in the tech (GOOG) and the financial space (GS, BAC). And while these industries don't appear similar on the surface, they do tend to impact the overall market sentiment and direction. Our strategic mindset continues to be market neutral - we're trading with the trend (don't fight the tape), while keeping one eye on the exit for the day someone yells 'Fire!' and actually means it. Our Primary Model Portfolio is aligned with this mindset with a diagonal on VXX that is long term bullish on vol while being short term bearish. We have a similar position in BAC.

Target: Google (GOOG), currently trading at $652.

Commit Criteria: GOOG reports earnings on 4/21 so this trade takes into account the historic movement in implied volatility around these events (surges roughly 40%), while taking an overall neutral stance on earnings. The tactic we have chosen suits our strategic mindset and commit criteria.

As you can see from the one year chart below, GOOG tends to have large gap moves around earnings

GOOG has also had a nice recent run with our Fed induced bullish market:

Tactic: April 585/590/700/705 Iron Condor

Tactical Employment:

1. Buy 15 Apr 585 Puts
2. Sell 15 Apr 590 Puts
3. Sell 15 Apr 700 Calls
4. Buy 15 Apr 705 Calls

Midcourse Guidance: We're going to hold this trade in our model portfolio through the earnings announcement unless something drastic changes midcourse. The short call and put strikes we've selected are 1 standard deviation away and are within the historical earnings movement of the stock.

There's a 72% probability of keeping the max credit on this trade, or $2100. The max loss is $5,400, a little north of our rule of engagement which states that we will not risk more than 5% of the $100,000 model portfolio on any one trade. As the Pilot in Command of the Primary Model Portfolio, I am comfortable with this risk. There's a 24% probability of incurring the max loss.

We have 2 B/E's (break even) on this trade due to the tactic we're employing, an iron condor. The stock obviously can't s[lit and head in 2 directions, both up and down, so to the downside our breakeven is $588.60 and to the upside $701.40

As stated above we're looking to stay in this trade through earnings to potentially collect the max credit.

Threats: GOOG is a bucking bronco around earnings. You can literally feel the market hold its collective breath waiting for the announcement. This fuels the run up in volatility. Once earnings are announced the stocks moves one way or the other and we see a vol crush.

Exit Tactic: Reverse the entry position by buying back the 2 spreads to close.

Firing Line: We selected a bull put and bear call spread $5 wide to help us manage risk. If we wanted to take more risk and potentially take in more of a credit we could've selected $10 wide strikes. But this increases our risk significantly. We're comfortable with $5 wide strikes and if the stock gaps up or down through one of our short strikes we will close that leg as quickly as possible to limit loss. As always at Top Gun Options we close a trade if our Commit Criteria change for any reason.

Barron's most recent edition called for housing to 'turnaround by Spring 2013…if not sooner'.

After a 6 year rout the financial publication sees signs of life in the housing market and believes the time may be right to look at potential trading opportunities to capitalize on their bullish mindset.

The Top Gun Option's Chief Strategist, Matthew 'Whiz' Buckley, takes a look at Toll Brothers (TOL), Beazer Homes (BZH), the Homebuilder ETF (XHB), and Avalon Bay (AVB).

Follow this link to watch today's Market Intel Brief:

http://youtu.be/V5y9GqkZ9Bc

To be clear - headwinds remian. Stagnant wages, unemployment, stringent leanding guidlines from banks, and a shadow inventory of nearly 5M homes in the 90 day delinquent window.

A wise trader once said, 'They don't ring a bell at the bottom or the top of the market'. If we're not close to a housing turnaround, it may be time to go long bullets and butter.

Happy Hunting and Make Sure You Hedge!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.